HSBC Suggests Fed Could Resume Rate Hikes by 2026

Investing.com — HSBC analysts have recently noted that while the Federal Reserve is currently implementing an easing monetary policy, there is a possibility that interest rate hikes may resume by 2026.

According to their analysis, after maintaining steady rates for 14 months, the Fed has reduced rates by 50 basis points, following similar actions from the European Central Bank and other G10 central banks.

HSBC highlights that inflation, although still high, is decreasing, and signs of a cooling labor market are permitting a more relaxed monetary policy. However, the bank cautions that uncertainties persist.

Factors like global economic conditions, political shifts, and market volatility could all influence the Fed’s future decisions. A significant consideration will be the outcome of the upcoming U.S. presidential elections in 2026, which may affect both fiscal and monetary policies.

HSBC indicates that potential policy changes proposed by candidates post-election could influence the Federal Open Market Committee’s (FOMC) perspective on the neutral rate and the degree of restrictiveness required in policy.

The bank outlines two primary scenarios: one where fiscal tightening leads to further rate cuts, and another where supply-side shocks, such as changes to tariffs and immigration policies, could trigger rate hikes. They believe that the latter could necessitate an increase in rates, regardless of whether Jerome Powell continues as Fed Chair after his term ends in May 2026.

Furthermore, the bank suggests it is plausible that the Fed might already be in a rate-hiking phase by 2026, not necessarily due to political decisions, but simply because the economy may rebound more robustly than anticipated following the current monetary easing.

However, they acknowledge the possibility that if the Fed is perceived to be lagging behind economic trends and a significant downturn occurs in 2025, rate cuts could still be in play for 2026.